Weathering the Risk Transfer Storm: It Can Be Done
by American Subcontractors Association

A famous cartoon beagle had a habit of beginning his novels with the words "It was a dark and stormy night." Just as easily as any other ending, he could have finished that first sentence "* when the construction subcontractor had to interpret, obtain, and provide proof of, insurance to meet its contractual requirements." Ask any subcontractor, and he or she is more likely than not going to tell you about the torrent of confusion and generally tainted air surrounding compliance with contractual insurance requirements. Owners and Contractors Protective (OCP) liability insurance and Project Management Protective Liability (PMPL) insurance provide an alternate happy ending to the subcontractor's story.

The American Subcontractors Association's (ASA) white paper, "'Hold Harmless' Reborn: Insurance Requirements" explains why insurance requirements have become so difficult to interpret and comply with, and offers tips for subcontractors to negotiate insurance requirements that are more straightforward and simpler to satisfy.

ASA's white paper explains that, rather than serving the purpose of insurance, many times contractual insurance requirements are used for a different purpose: "Many typical insurance requirements actually undermine incentives for responsible conduct and leadership, perversely defeating the legitimate aims that insurance requirements might otherwise serve. In particular, subcontract terms requiring a seller to name its customer as an 'additional insured' on the seller's general liability insurance policy, or requiring a seller to provide a 'waiver of subrogation' for claims paid by either the seller's workers' compensation insurance or its general liability insurance, shift the customer's potential liability for its own supervision and hiring errors to the seller in much the same way as a 'hold harmless' clause."

In theory, insurance is required to provide assurance to the subcontractor's client that the subcontractor's insurer will cover any losses the subcontractor might cause. In practice, however, the requirements are used to transfer losses unrelated to the subcontractor's actions to the subcontractor's insurer.

As a result, ASA's white paper says, subcontractors frequently end up being required to (1) insure potential losses for which insurance is not available, (2) insure much more risk than they priced in their bids, and (3) participate in controlled insurance programs that provide custom (and not always adequate) insurance and add administrative costs.

OCP and PMPL insurance products are the silver lining of this dark cloud. These products are designed specifically to assure construction owners and prime contractors that their liabilities for supervising the project are insured, while curbing the unnecessary transfer of risk to subcontractors. OCP covers the named-insured prime contractor against claims based on its "general supervision" of one subcontractor's operations, while PMPL acts as an OCP policy for the prime contractor's supervision of all the subcontractors on a project.

Learn more about contractual insurance requirements. Visit ASA's Web site at www.asaonline.com and click on "Stand Up! for Subcontractors" or call ASA at (703) 684-3450.